Sony Shock Déjà vu?

Posted by: Kenji Hall on October 24, 2008

Sony Shock déjà vu? Sony’s profit warning less than 24 hours earlier triggered a dramatic sell-off in Japanese stocks on Oct. 24. By the end of the day, the Nikkei 225 stock index had lost 811.90 points, or 9.6%, to rest at 7,649.08. It was the index’s lowest closing level since April 28, 2003, when it was 7,607.88. The broader Topix index finished 7.5% lower.

Sony fared worse. Investors scrambled to dump Sony shares, sending them 14% lower by the close. So far this year, the company’s shares have lost 67%—or $41.8 billion—of their value.

It’s easy to blame Sony for the market plunge. After all, it was the company’s move to slash its operating-profit forecast by 57% that sparked the selling. The market bloodletting could have been worse: The Nikkei index wasn’t far from a new 26-year low. Even so, some traders couldn’t resist the temptation of comparing the day’s events to the Sony Shock of 2003, when the company’s problems peaked—and the rest of the market paid for it.

But Sony today isn’t the company it was five years ago. Back then it was a basket case. Its business units were constantly at war, it was hemorrhaging cash, and its gizmos weren’t as cutting edge as those of more nimble and innovative tech players. After CEO Howard Stringer took charge three years ago, he gave the company a new lease on life.

Many of the ambitious targets CEO Howard Stringer set for the company less than four months ago will have to be recalibrated. But even with the soaring yen and the market chaos, the company is expected to eke out a profit this fiscal year, through March 2009.

The upshot: Sony was more the symptom than the cause of the market\s woes. What’s hurting Sony—a strong yen, securities losses and weakening consumer demand—is likely do some damage to other Japanese blue chips, as well.

Sony earns three-quarters of its revenues outside of Japan, so it can be viewed as an extreme case of what happens when the yen swings too suddenly in the wrong direction. According to the company, every 1 yen appreciation against the dollar shaves 4 billion yen ($43 million) off Sony's operating profit.

But in the coming days, it won't be a surprise to see similar downward earnings revisions from other major Japanese exporters. That's what the day's correction was really all about. Earlier this month Sharp lowered its full-year earnings, and just this week JP Morgan warned that Panasonic, which is slated to announce fiscal first-half earnings next week, could struggle in the second half (October to March) amid weaker demand for flat TVs and other digital gizmos.

And the pain for Japan Inc. could get worse if the yen continues its steady march higher. In late Tokyo/early London trading, the dollar fell to 92.80 yen, its weakest in 13 years, and the euro slumped to 117.21 yen, a six-year low.

Reader Comments

Mark

October 24, 2008 11:03 PM

There could be more painful roads ahead for car, consumers' electronics industries... given there are rising number of bankruptices, unemployments, foreclosures, leverages, debts, taxes (where taxpayers need to pay for trillions of $$ of banks bailouts). Finally, the era of easy money is over! Banks are now more prudent to lend their $$

Self Destruction

October 25, 2008 5:16 AM

This is boomerang effect. Japan has too much money accumulated through trade surpluses, lending, investment. With this huge capital, Japan used to be the major source of bubbles in Latin America, South East Asia, and Wall Street. Whenever there is regional problems, they used shelter in US, especially in treasure bonds. Now both US and Europe are in trouble, money should come home! This will have deadly effect to Japanese manufacturing companies, like Sony, Toshiba, ... This double blows: Japanese Yen rising sharply. Rival companies in other ciuntries such as Korea, Taiwan, etc., will enjoy significantly depreciated currency advantage. We can easily how the gap will be. Companies like Samsung, Acer, .. will take over Japanese markets.

This is self destruction: Japanese capitalists destroying Japanese bluechip companies!

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